Talks between congressional Republicans and Democrats aimed at averting another US government shutdown have broken down without an agreement. Expectations were that we would get a deal by Monday to give congress time to pass the legislation by Friday when the current deal runs out. It’s yet to be seen whether a new deal can be agreed in time to avert a second shutdown of the year.
The main release for the US dollar this week is probably the inflation data due on Wednesday. This is especially true after the Fed indicated at January’s meeting that they were focusing on a more data driven approach to policy. Better than expected CPI data will likely push the US dollar higher and vice versa for a lower reading. Higher inflation would also put pressure on the Fed to start to raise interest rates again attracting foreign capital and therefore giving the currency a boost.
Friday’s retail sales number will also be a focus for the Fed and the US dollar. The December reading is a key one for the retail sector as it covers the festive trading period, the number has been delayed due to the government shutdown. With the looming deadline for Chinese and US trade tariffs being reimposed there will be added focus, but slim hopes of some kind of deal being put in place.
Fourth quarter German growth data out on Thursday is the main release for the Euro. It is forecast to show a 0.1% rise compared to the previous quarter, which showed a -0.2% fall. If Q4 also shows a decline it will mean the German economy has contracted for two consecutive quarters which is the definition of a technical recession. If this is the case then it will almost certainly weigh on the Euro.
A key event for the Euro could well be the February 17 deadline for the U.S. government’s investigation into foreign car imports and whether they pose a ‘national security risk’. If the US decides they do, President Trump will have by May 18 to decide whether or not to impose tariffs on cars of up to 25% which would be a major blow to the European car industry, and weigh heavily on the Euro as well as hit Eurozone growth prospects
Another key release is Eurozone employment data out on Thursday. This is forecast to show a 0.2% rise in people in employment compared to Q3 which itself showed a 0.2% rise from Q2. A strong result would provide marginal support for the single currency.
Brexit remains the key driver for Sterling with the currency moving on the expectation of a deal or no deal scenario. Sterling seems confident at the moment of some kind of deal being agreed, which is why we have seen it outperform other currencies since the turn of the year. News over the weekend gave us an indication that MP’s in the UK want to give Theresa May more time when it comes to negotiations. It seems lawmakers will have another say by the end of the month where it could be agreed that the PM seeks an extension to Article 50 (the function and date of leaving the EU).
Prime Minister May will make a statement to parliament on February 13 updating lawmakers on her progress so far in seeking changes to her deal. The debate on February 14 will be on a motion — a proposal put forward for debate - about Brexit more generally. However, because May is clearly engaged in negotiations with the EU, parliament is expected to give the PM more space and time.
There is little domestic data of note out of Canada in the coming week so the Loonie will probably take its cue from changes to the price of oil, as well as any developments out of the US regarding China.
Oil is Canada’s largest export so changes in its price often impact on the supply and demand of its currency. Last week’s decline came amidst fears the trade war between the U.S. and China would escalate as time is running out to successfully find a resolution before the March 1 deadline, after which the U.S. is set to raise tariffs from 10% to 25% on $200bn worth of Chinese imports.
It is thought that if tariffs rise it will trigger an even deeper global and Chinese slowdown and part of the response will be a reduction in the demand for crude oil. Yet others say oil prices could actually rise due to the possibility of a merger between OPEC and Russia to officially form OPEC+, which would give the cartel even more power in controlling the price of oil.
The outlook for the Australian Dollar has been dominated by a much weaker outlook for the domestic economy. The market is now pricing in the next move in rates by the Reserve Bank of Australia to be an interest rate cut, rather than hike which had previously been expected.
Concerns about the policy will likely lead to the currency continuing with its negative bias as the week moves on, following on from Friday’s falls after the RBA cut growth forecasts. The central bank now expects the economy to grow by just 2.75% in 2019, down from the 3.25% forecast issued at the end of last year.
There is no doubt that it’s the Reserve Bank of Australia rate decision on Wednesday that will be the major talking point this week. Despite recent poor employment data which showed the unemployment rate jumping to 4.3% in Q4 from 4.0% in Q3, the Reserve Bank of New Zealand is not expected to change the official rate from its current 1.75% level. A change in the interest rate would have a profound effect on the Kiwi. Higher rates are positive and vice versa for lower rates.
The statement which accompanies the decision and the press conference with the governor could still cause some volatility for NZD, however, even if the bank does not change interest rates. Again we focus on whether the governor will be dovish in his assessment of policy, a move that would add more pressure to the Kiwi.
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Yields are up, but it was a tale of two divergent tapes in US equity markets; Oil heads lower as dollar strengthens; Gold takes the express elevator down